RBS and Lloyds take Irish property hit

September 4, 2009

Published Date: 04 September 2009
By Erikka Askeland
PROBLEMS with the downward-spiralling Irish property market have caused Royal Bank of Scotland and Lloyds Banking Group to bolster the balance sheets of their respective businesses in Ireland, it emerged yesterday.
Since February, RBS, which is 70 per cent state-owned, has injected about 1.1 billion (£961m) into its Ulster Bank unit. Lloyds has shored up its Bank of Scotland Ireland (BoSI) division with 1.4bn.

The bail-outs have come as both banks’ Irish visions struggle under the weight of collapsing Irish property values. Commercial property, agricultural land and Dublin houses have fallen by an estimated 40 to 50 per cent since early 2007.

RBS’s Ulster Bank posted a £500 million loss for the first half of the year, after writing off £641m of impaired loans.

The write-offs largely relate to the £15bn property-dominated portion of the bank’s £54bn Irish loan book. Ulster Bank also has some £16bn in Irish residential mortgages. As a result, it is shedding 1,000 jobs and closing its First Active mortgage lending unit.

RBS said yesterday that the cash injection was a part of its “normal capital management”, but Irish banking analysts said the Irish operations of both RBS and Lloyds were likely to need equity to cover loan losses.

Anna Lalor, financial analyst with Dublin-based Goodbody Stockbrokers, said: “Banks manage capital to a large extent on a group basis and as it is required they put it into a subsidiary to make sure they are in keeping with their capital requirements. With taking loan losses they do need to have capital injected.”

A spokeswoman for Lloyds said: “We continue to provide capital and funding support to BoSI, as we would do in the normal course of business and on an ongoing basis.”

The extent of the troubles facing lenders to the Irish property market was laid bare earlier this week. In a sensational High Court trial that is gripping the country, University College Dublin economist Morgan Kelly said Irish banks were “probably insolvent”. Lenders are currently holding on to massive loans – estimated to be worth £115bn in 2007 – made to Irish builders and property developers during one of the biggest property booms in Europe.

The High Court case is being heard as one of the country’s biggest property developers, the Zoe Group, seeks a protective “examinership” of a number of its businesses, the majority of which are property focused, which owe the banks an estimated 1.3bn.

Zoe is understood to owe BoSI 321m, while Ulster Bank is a backer of Zoe’s 25 per cent stake in food retail giant Greencore.

Most Irish banks, including AIB and Bank of Ireland, are preparing to sell troubled property assets into the Irish government’s forthcoming 90bn National Asset Management Agency (NAMA).

It is thought neither Ulster Bank nor BoSI are eligible to participate due to their involvement in the UK government’s asset protection scheme, although the former says details of the scheme are still being finalised.